Question

Answer the following questions with "Yes or No"

A:

Transfer of Ownership Test:

There is NO provision in HYPER to transfer ownership of the leased asset to the lessee. The lessor and the lessee expect that the lease asset will be returned to the lessor at the end of the lease term.

Has the “transfer of ownership test” been passed?

B:

Purchase Options Test:

HYPER grants NO “bargain purchase option” to the lessee. If the lessee at any point wants title and ownership of the asset it will need to have a separate negotiation with the lessor.

Has the “purchase option test” been passed?

C:

Lease Term Test (or the 75% Test)

This Test requires that the lease term is 75% or more of the economic life of the leased asset. In HYPER, the lease term is 2 years; the lease contract cannot be cancelled. The economic life of the asset is estimated as 3 years.

Has the Lease Term Test been passed?

D:

Present Value Test

Under the terms of HYPER, the present value of the lease payments are substantially less than 80% of the Fair Market Value of the leased asset as of the start date.

Has the Present Value Test been passed?

Answer 1

Required A.

No Because the transfer of ownership test is passed only if the lease agreement specifically mentions the same.

Required B.

No, becuase the purchase option test is passed if the lease agreement grants an option to the lessee to purchase the underlying asset and the lessee is reasonably certain to excercise the option.

Required C.

No, because the lease term is 2 years which is less than 75% of the economic life of the asset i.e. 75% of 3 years or 2.25 years

Required D

No. because present value test is passed if the present value of all lease payments equals or exceeds the substantially all of the FV of the underlying asset. Reasonable approach to assess this criteria is 90% or more. In this case the present value is less than 80% of the FV of the asset and thus the test is not passed.

For any clarification, please comment. Kindly Up Vote